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Mortgage Stress: Armageddon in waiting

There’s no easy way to say this. Right now, the government’s economic policy is on a collision course with ballooning private debt and a meltdown is hurtling toward us as certain as night follows day.

To use a popular metaphor, as things stand, the frog is well and truly in the saucepan, the hotplate is on full, the water is getting uncomfortably warmer and the frog still hasn’t realised he is in deep trouble.

That is the best way I can think of to describe the current state of private debt and what is going to happen a little further down the road without some drastic intervention.

Since the Howard/ Costello years of fiscal surpluses when private debt hit the ceiling to offset them, the situation for households has become steadily worse and about to head through the roof.

Today, mortgage interest payments are at the same level as they were in 1989. Yet, today’s average mortgage rate is 5.2% compared with 17% in 1989 and mortgages today are ten times greater than they were in 1989.

house 2If that doesn’t jolt you to the reality of the situation try this: Australian households are now one of the most heavily leveraged in the world. In 1990, household debt accounted for about 60 per cent of income. By 2013, it had risen to 180 per cent; and the reason is mortgages.

In April 2015 owner occupiers alone borrowed $9.8 billion. Investors borrowed $11.5 billion. Australians currently owe $1.4 trillion in mortgages.

It is in this fragile environment that Joe Hockey wants us to go out and borrow. He wants young people to get a good job that pays good money and to build, build, build. Effectively, he is asking them to turn on the hotplate, jump into the saucepan and pay no attention to clowns like me out there warning of what happens when the water boils.

There is one sure way to know if he is sincere in what he urges us to do and that is to ask: is he and his government doing the same? No, they are not. They are cutting back on anything they can get away with and then some. They are selling assets to get back to surplus. That means only one thing for consumers….more private debt.

The principle is simple. When governments spend more than they collect in taxation, consumers are able to save. When governments spend less than they collect in taxation, consumers are forced to take on debt.

The government is currently spending more but their policy is to cut back further to the point where taxation receipts are greater than outgoings. If they succeed, the private sector will go deeper into debt.

If Joe Hockey was to set the right example and do what he is asking of us, his fiscal policy would be to spend more….lots more, not less. If he wants us to spend, government should be spending too, thus enabling us to spend and save.

interestWith interest rates at record lows, the temptation to borrow is strong. Similarly, the banks are more than happy to lend, based on your ability to meet your mortgage payments. But what happens when interest rates and consequently mortgage payments, start to rise again?

It’s not rocket science. In a recent blog, Bill Mitchell warns, “The other point is that with the massive debts already being carried by home buyers, the situation will become worse when the RBA, at some point, starts pushing up rates again and house price rises start to taper.”

Already, most home mortgage payments require two incomes. With wages growth flat lining, where will the extra money come from when rates begin to rise? These higher payments will only lead to greater mortgage stress which will, in turn, impact on private spending right down to essentials such as food, clothing, power, etc.

Reduced spending will impact on employment be it casual or full time and that will threaten the two income household first.

It will also impact on the banks. Depending on the margin between what banks have lent and the value of the property the loan covers, they stand to lose in a big way. A burst property bubble means a collapse in values rendering their loan securities highly vulnerable.

They will act quickly and brutally, demanding loans be called in, or additional security offered. What highly leveraged home owner with just one income and children to care for, will have that?

hockYet Joe Hockey wants you to build, build, build. Will he and his prime minister act to guarantee mortgage security when the crash comes? Don’t hold your breath.

Australia avoided the personal devastation of a property Armageddon post GFC, unlike our cousins in the USA, Europe and the UK who are still recovering. We are yet to feel their pain. But the reality will dawn on us sooner rather than later. It’s a case of when, not if.

I am not a financial adviser and without prejudice think the best advice for those trying to get into the market is to save but don’t buy. Wait a year or two for the bubble to burst when housing affordability will be a reality.

27 comments

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  1. townsvilleblog

    No doubt about it if you want a home in future you will need a bloody good job with bloody good pay, much like the $10m man himself mr Hockey:

  2. kasch2014

    When will all you poor money monkeys realise that money is not a resource. Every generation makes the same f….ng mistake, nobody learns a thing. And these days people are so vulnerable because so many people’s jobs are non-jobs. Banking, retail, marketing, real estate – these “jobs” only produce more debt and increase the cost of things that haven’t really got a value. Land is not a resource that people make, it is a life support system which these jobs destroy. Time for a restart of this country, and the world society. http://www.lifesupportinternational.org . We can no longer afford our insane and diseased governments, or the colonial joke-constitution that they operate under. Politics is not a science, neither is economics. They are social diseases that will utterly destroy us. The system is f….ed. Wake up, Australia. The soft options have been mostly used up, and every day wasted will probably mean an extra year of pain. We need good long-term management, not spin and money planning. We need good values, not fear, greed and ignorance exploited.

  3. darrel nay

    thanks kasch2014

    I love your focus on values and I agree with your website where it recommends re-empowering local people through local government.

    Cheers

  4. PopsieJ

    The sooner Greece defaults and the whole of this Ponzi, print more money bank led rip of collapses the better.

  5. darrel nay

    I vote popsieJ

  6. darrel nay

    Hey John,

    Thanks for the article. I must say that the water has been boiling frogs for some time – I mean the leverage in the property market has already led to countless suicides and family breakdowns. I am sure books have been filled with details of the damage bank sponsored leverage has caused in this country, and yet compared with other countries we have been spared by our banksters.

    Cheers

  7. carlo

    As a young person who almost has enough for a deposit to get an investment property in melbourne im thinking more and more of holding off now as the current situation seems overblown in terms of housing value etc. Obviously people say the sooner you get into the market the better but i dont want to buy this year only to have interest rates go up and housing value go down. Might be another 5 years till the “bubble” bursts? how much would interest rates go back up? how much would values go down? its hard weighing up actually buying now and take a little dip in value and short rise in rates if that value over the long run will ultimately go up be worth it as an investment? So many people with conflicting advice

  8. darrel nay

    reply for carlo,

    You could try reading David Rockerfeller’s book ‘Memoirs’ – it lays out the long term plans by the bankers who manage the whole show.
    Cheers

  9. Michael Taylor

    Carlo, if it is an investment property and you intend to keep it for the long haul then it won’t matter so much if house prices drop in the near future. It would only matter if you plan to resell it in say less than 5 years. And going by all the talk from the Reserve Bank it’s doubtful that interest rates will be going up any time soon. While interest rates a low it’s best to get a fixed interest loan.

    But having said all that, it also might be best to wait until you have a 20% deposit to avoid paying mortgage insurance. It’s a tricky game.

  10. stephentardrew

    Johna agree with your article however the US, UK, Europe are only in partial recovery and though their housing markets collapsed it has still become unfordable for average workers and many of the middle class. New bank loans will be prone to the same forces as interest rates eventually increase. The magical mythical hypocrisy that the markets can be controlled by fiscal policy goes against the belief in the free market and deregulation. The narrative is a paradoxical, and demonstrably contradictory, mess of competing imperatives operating outside of the idealised framework of economic rationalist modeling.

    Econometric models are no more than rough guesses based upon preexisting assumptions which have time and time again failed miserably. It is important to note that Glass Stegal has not been reinstated and Dod Frank has been weakened and only partially rolled out. A lot of people are going to be hurt.

    The story arising from the 2008 collapse has only been partially written. Not only did these countries experience depression they are now in a similar situation where wages for lower and middle income earners continue to flatten, and even drop, underscored by deflation while the markets give an artificial lift to banks that are still fragile. Meanwhile the one percent are living it up. I think Bill Mitchell hits the nail on the head however how many failures will it take before the facts undermine conventional thinking. Several cycles later we are still riding the same old donkey-cart of boom bust.

    The current situation is a whole new ball game heading towards inevitable disaster. It will continue if there is not a drastic change to the way capitalism functions so that it is re-framed to meet democratic objectives of justice, equity and utilitarian distribution a la Bill Mitchell and Modern Money Theory advocates.

  11. Andreas Bimba

    Thanks John for another easily understandable and important article. Your prediction of it bursting in a year or two is bold. Just in time for a Labor government to get the blame and the conservative snakes to blame Labors debt for the collapse. What a farce, so many lives will be harmed or destroyed and the poor taxpayer will be expected to bail out our stinking complicit banks.

    No, we must let the banks fail so that their shareholders learn what the consequences of them allowing incompetent management really means.

    It may however be possible to have a managed deflation of the property price bubble and to have rational housing policy if competent economists such as the MMT adherents and the Greens were to win government in 2016 but the electorate will most likely not realise this.

    The biggest losers will be the mortgage belt who predominantly voted and will continue to vote Liberal. Sad and unfortunate justice for choosing to be ignorant.

    It is however not too late, vote Australian Greens in 2016.

  12. percy jones

    Lying Pricks The GFC cost more than half my Super so called GOVT BACKED nothing but FILTHY LIARS

  13. Harkobus

    Fiat currencies and debt fueled growth was always going to be a disaster.

    “debt on our planet has grown from 142 trillion dollars at the end of 2007 to 199 trillion dollars today. This is the largest mountain of debt in the history of the world”
    “Anyone with half a brain should be able to see that this is a giant financial bubble”
    http://theeconomiccollapseblog.com/archives/the-debt-to-gdp-ratio-for-the-entire-world-286-percent

    Those in charge are either incompetent morons or geniuses if, total economic collapse and a one government new world order is what you want.

  14. mikestasse

    Great article. Thanks John.

    Now, why is it that when I write stuff like that I get howled down?

  15. Harkobus

    I will add, reserve banks control our governments. The BIS will control the new world order, maybe.

    “How can I explain this to you? The world is not run from where you think it is. From border fortresses. Even from Whitehall. The world is run from Antwerp, from Florence, from Lisbon. From wherever the merchant ships set sail off into the west. Not from castle walls, but from counting houses. From the pens that scrape out your promissory notes.
    So believe me when I say that my banker friends and I will rip your life apart.” — Thomas Cromwell

    http://www.abc.net.au/news/2015-05-28/kohler-forget-banks-data-is-where-the-money-is-now/6501298

  16. John Kelly

    Harqobus, nice quote from Mark Rylance. But was it from Cromwell himself or the writers of ‘Wolf Hall’? Either way, it is accurate.

  17. darrel nay

    David Rockefeller quotes

    “We are grateful to the Washington Post, the New York Times, Time Magazine and other great publications whose directors have attended our meetings and respected their promises of discretion for almost 40 years……It would have been impossible for us to develop our plan for the world if we had been subjected to the lights of publicity during those years. But, the world is more sophisticated and prepared to march towards a world government. The supernational sovereignty of an intellectual elite and world bankers is surely preferable to the national autodetermination practiced in past centuries.”
    ― David Rockefeller

  18. stephentardrew

    Thus the oligarchs remain the true wielders of power as the media fawns over the leftovers while, through feigning blindness, pretending they cannot see.

  19. Zolf

    This man, who calls himself treasurer, is trying to outsource even economic stimulus. The same clown who “gave” the RBA $8.8B.

  20. Kyran

    Wonderful work, as always, but I think there are several other factors that will impact on any comparison between the ’89 recession we had to have and todays debacle. Back then, bank managers were doing ‘drive by’ valuations and they’d invented this thing called ‘low doc loans’. My experience of what saved them was mortgage insurance, which promised the insurance company would bail them out, as soon as they bankrupted the borrower. To avoid scrutiny of the racket, they promised to get rid of ‘low doc loans’. So they invented mortgage brokers. Fast forward to the GFC when they were doing the same crap, but calling it different names. The government created the bank guarantee scheme for deposits, which allowed banks to bend the rules on APRA liquidity levels. The bank’s share prices go wobbly every now and then because shareholders get squeamish about ‘bad debt provisions’, which the bank’s play with. All of the major’s have been writing down, not increasing, bad debt provisions. If you factor in credit card debt, at over $50 BILLION (which is unsecured) and the new employment paradigm of no security of tenure (part time/casual, annual contracts etc) well, I’m feeling more like Eeyore than Christopher Robin. Your reference to a “clown’s advice” begs only one question. Can we get a job in your circus? Cause the circus in Canberra sucks. Take care

  21. kasch2014

    I own a place I bought 29 years ago for $25.000 and I believe that no one should own more than what they live in and can maintain and manage themselves.If I sold now. the $180.000 I would get if lucky would not buy anything as good (established with off grid 90% renewables, food and fuel supply, etc.) anywhere in Oz. I tried to sell when the kids went to high school and we had to rent a house in town for them to avoid 4 hours of travel a day. But, apart from debt and stress there was nothing on offer. The “investors” blew up the housing market then, with an instant $20.000 increase on houses in town because of the new home owners grant. I consider these financial manipulations destructive, criminal activity. and I am so glad I didn’t sell – my daughter has moved back home and is working to make a life here. She has also realised that you cannot buy quality of life, or invest in a future with money that has no value in it’s own right. The love of, and dependence on money, has become a terrible mental illness that will destroy us all. Money is NOT a resouce, and when this illusion comes home to roost, the consequences are usually tragic and vast. At the moment the idiotic greed and ignorance of all is destroying our life support system at a fantastic rate, but the urban dweller especially maintains a “virtual” life until it is much too late. If you had lived through the post WW1 German and general European experience, you would know what I am speaking of. Except now, most of the soft options for change have been used up, and our life support system is under far more stress. There are no actions to repair this in the short term, and I believe that present generations have no real notion of what’s coming round the bend!

  22. darrel nay

    I read somewhere that the banks’ speculations on retail real estate (sometimes via proxies) is responsible for 40% of the value of the bubble-market. The young will not be able to afford homes like previous generations and the only entities positioned to snap-up the stressed property will be corporates and their minions.

  23. Harkobus

    John Kelly.
    I don’t think the quote was from the real Cromwell himself but, from the writers via the his on screen persona.
    I decided to add Cromwell’s name for effect. Apologies for being lax. I should have added more detail and will in future.
    Cheers.

  24. Gangey1959

    I’m with PopsieJ.
    What is the ‘all powerful oz’, in any manifestation, going to do if WE all default and say “F*CK YOU” ?
    I watch in amazement as houses are bulldozed into the ground in america because that is the cheapest option.
    For whom ?
    If bank X is not going to be paid anyway, why not let the house be lived in ? At least someone is out of the wind and rain.
    History is littered with leaders and governments who have fallen to the violent will of their people. Nero fiddled, James 1? and Louis the WGAF were beheaded. ISIS is just a diversion that can be magnified and/or positioned anywhere on Earth.
    If we all stop paying off our un-affordable debt together, there are not enough court services to evict us, nor are there uniforms of any description to throw us all into the street at once.
    So once again, SCREW THEM. Payback is a real bitch.

  25. Pingback: Mortgage Stress: Armageddon in waiting | THE VIEW FROM MY GARDEN

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